Because of their customer-abusing practices, few tears will be shed when the banks fail

William Seidman is the former chairman of the Resolution Trust Corp., the agency Congress set up in the 1980s to clean up the savings-and-loan lending mess. He’s also a former chairman of the FDIC. Here he talks about the housing rescue plan taking shape in Congress and on the state of banking in the United States. The picture he paints isn’t pretty.

William Seidman

How important is this Senate housing rescue plan?

The Senate plan will certainly be some help. It will take a part of the problem in the financial system and perhaps cure 25 percent of it. It isn’t an answer to all the problems we have.

Were you expecting to see a lot more, at least coming from Washington?

I think it’s as much as they can do with the subprime mortgage issue. The real job will be to get the financial system back on its feet and that’s going to be largely a private sector exercise, I think, with a substantial number of bank failures.

Where are we on that curve now?

Generally banks start to fail about a year after the events which cause the trouble. We’re probably about seven or eight months down that year. So before the end of the year, we’ll probably see a number of bank failures, particularly in Florida, Texas, California, Nevada, where the housing boom was.

So these are local or regional banks attached to the local residential or commercial markets?

ExactlyCompare what’s happening now and what you saw in the S&Ls crisis in the 1980s.

What’s happening now has only one thing in common with what happened back then and that’s loans not being repaid. The problem with the S&Ls is that loans were in the failed banking and S&L institutions. They were not securitized and passed on all over the world the way they are in the present problem. What we had then was more easily handled because we had our hands on all the bad loans.

Could there be more bank failures now than there were in the 80s?

Nowhere near. In the 80s, with the S&Ls, we had somewhere over 15,000 institutions fail. I don’t think we’re going to see anything like that in this case because most of these bad loans were securitized and sold outside of the banking system. For the banks that are in trouble, some of them bought these securitizations and some were financing the housing bubble.

Is there more Washington or the Fed should do?

The Fed has got to get themselves out of the business of loaning on second-class security and get themselves out of the position where they’re creating money through making these loans that they may not want to do because of inflation. The Fed’s assignment is to get themselves out of this as quickly as possible. The FHA’s assignment (Federal Housing Administration) is to refinance all the loans that they can get the lenders as securitizers to bring in and make a one-by-one private deal with them. The FDIC’s job is to go out and make sure that all the banks that are in a failing position are closed and are liquidated. There are a lot of parts of the government that have to work on this to clean things up.

The signs are they’re getting to it?

The signs are that they are starting to get to it. The Fed is starting to figure out what to do with this huge amount of lending that it’s done. The FHA legislation has not even been agreed upon in the Senate yet. The FDIC is just in the process of looking at all the banks and deciding which ones will need to be closed. Finally, I think there are a lot more loans that are going to go bad and that have not yet reached the foreclosure stage… I don’t think we’ve seen as much of the trouble in the home mortgage area yet as we’re going to see. I don’t think we’re even half way through that.

What are some of the milestones that will show we’re turning the corner or are starting to turn the corner?

You have to look at how many home mortgages have been refinanced. You have to look at how many banks have been closed. You have to look at whether the securitization market has opened up again. It’s totally closed now. You have to see when the financial system starts working again. It is really not working now, or great and large parts of it are not working.